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What Ha Joon Chang Doesn’t Tell You about ‘Free Market Economics’

Professor Ha Joon Chang has become something of a hero to those who champion heterodox economic theory and who rail against the supposed intellectual hegemony of ‘neo-liberalism’. In a number of books such as Kicking Away the Ladder Chang sets out to overturn the alleged orthodoxies of mainstream economics by questioning the case for free trade as an appropriate development strategy in poorer countries and more widely making the case for a high regulation/big government agenda. These themes are vividly on display in Chang’s latest best seller 23 Things They Don’t Tell You About Capitalism. Unfortunately, also on display in this book is Chang’s penchant for misrepresenting opponents, the use of straw man analyses and claims to theoretical innovation for what amounts to ‘re-inventing the wheel’. In several posts in the coming weeks I aim to highlight these aspects of Chang’s work in the hope that his readers (should they venture onto this blog) might reconsider his ‘guru’ status.

If there is a core characteristic to emerge from Chang’s work it is a tendency to emulate the writing style of that other hero of heterodox economics – J.K Galbraith. In common with Galbraith Chang depicts himself as one of a few lonely voices standing up against the ‘conventional wisdom’. The particular wisdom he targets in ‘23 Things..’ is that of ‘free market economics’. As with Galbraith, however, one will scour Chang’s texts in vein to find serious and detailed reference to the work of authors alleged to subscribe to the positions he attacks. Thus, in a 285 page book which purports to offer a critique of ‘free market ideology’ Chang manages a grand total of just three references to work by said ideologues and makes no attempt to distinguish schools within ‘free market’ thought, such as the Chicago school, the public choice school or the Austrian/Hayekian tradition (surprisingly, or perhaps not, Larry Elliot the economics editor of The Guardian describes 23 Things as ‘superbly researched’). There is good reason for this tactic – detailed consideration of the actual views of ‘free market economists’ – as opposed to what Chang claims they say – would make it much more difficult to construct the caricatures that Chang wants to attack. In book selling terms, better to play to the left wing gallery and construct an ideological edifice – crying out for demolition by a Chang (or a Galbraith). In this post I will focus on just two examples of this tendency. Subsequent posts will discuss further illustrations.

One of the first ‘myth’s’ that Chang sets out to correct is the very idea of a ‘free market’. In classic Karl Polanyi mode he asserts that the ‘free market’ doesn’t exist because all markets are embedded in political/institutional relationships and require rules in order to function effectively (see my recent post Down with Karl Polanyi on this type of thinking). Immigration controls, for example, have an impact on the price of labour and illustrate how apparently ‘free prices’ are in practice determined by political regulation. When free marketeers highlight unjustified or distorting government ‘interventions’, therefore, this is little more than an ideological smokescreen – a pretence that the boundaries of the market are ‘natural’ and can be objectively identified when in reality they represent a nakedly political attempt to promote a very particular set of rules that reflect the prejudices of ‘free market’ advocates.

Anyone who has even cursory familiarity with Nobel winning ‘free market economists’ such as Vernon Smith, Ronald Coase, James Buchanan and F. A. Hayek – none of whom are ever cited or even mentioned by Chang – would know that they have never denied that markets depend on institutions and rules. What they have been concerned to identify is the character of the rules compatible with a social order that increases the scope for voluntary exchange between individuals and associations, rules which facilitate competitive experimentation in production and consumption methods and which encourage positive sum interactions rather than leading people to live at one another’s expense. There has never been any claim by these thinkers that the market economy constitutes the ‘natural’ state of humankind. Indeed in the Fatal Conceit, Hayek in particular offered an account (though not an entirely persuasive one) of the ‘natural instincts’ that lead people to resist ‘free markets’. Overall, the economists mentioned above start from certain propositions about the limited nature of human knowledge and/or the importance of incentives to human action and offer an account, backed with evidence (none of which is discussed by Chang), about the capacity of market institutions to improve the human condition, relative to political alternatives.

Within this context, there is legitimate scope for disagreement on the appropriate extent of ‘the market’ and the precise role of ‘the state’. In The Constitution of Liberty, for example, (a ‘free market’ manifesto, if ever there was one) Hayek sets out a range of government actions, including basic social security measures, educational provisions and environmental controls which he judges compatible with the basic principles of a liberal market economy. As a classical liberal, I think Hayek goes too far in the specific areas where he sees a positive role for government action, but there is no contradiction between the way that Hayek argues for specific policies and his overall defence of the ‘free market’. The interventions that Hayek recommends are informed by his view that social institutions should not thwart experimentation and should encourage the internalisation of costs. Thus, Hayek’s support for environmental controls such as town planning regulation is qualified by the requirement that these controls should be conducted at the local government level in a context of inter-jurisdictional competition. Chang, by contrast, offers no coherent theoretical framework or worldview against which to judge his own pet schemes. These appear to amount to little more than whatever Chang thinks will raise his profile as a heterodox thinker. Notably, in opposition to just about every other economist – neo-classical, Keynesian, monetarist, Chicago or Austrian, he has recently advocated the widespread adoption of tariffs as an appropriate way to deal with the current recession!

To suggest that there is no such thing as a ‘free market’ because there is no strictly objective way to define the boundaries of such a market is equivalent to saying that democracy is meaningless because no ‘pure’ form of democratic organisation has ever existed. Certainly, the existence of immigration controls no more undermines the case for the ideal of an open market economy than their existence undermines the case for democracy. Are we to conclude that the existence of nation states which limit voting rights to citizens to the exclusion of people from other nations somehow undermines the very notion of a democratic ideal?

In a particularly dishonest attempt to highlight the supposed inconsistency of free market economics Chang claims that there is a fundamental contradiction between support for free markets on the one hand and the fact that most free marketeers do not support free immigration (p.27). This claim is made without evidence and without a single citation to any relevant economist. I am a free marketeer and advocate the abolition of border controls. I do not claim to know all of the detailed policy positions of free market economists, but I do know that many, though not all, do in fact support free immigration. If one takes the economics department at George Mason University as one of the major hubs of contemporary free market thinking then most of its economists –Boettke, Coyne, Leeson, Klein, Boudreaux, White, to name but a few, are passionate supporters of the free movement of people. Moreover, those market-oriented economists who do not advocate free immigration (misguidedly in my view) tend not to be opposed to the free movement of people per se, but to be sceptical of its compatibility with contemporary welfare states. Of course, Chang isn’t interested in presenting such subtleties to his readers. Better to proceed on the entirely reasonable expectation that the average reader of The Guardian or The New York Times, won’t bother to check the facts.

This is already a rather long post and I have only begun to scratch the surface of Chang’s failures to present an accurate view of what free market economists actually say. Subsequent posts will turn to Chang’s views on development economics and on planning, complexity and government regulation.

* These are a reference to Adam Smith (p.13), a reference to a paper by Robert Barro (p.55) and a paper by Bruno and Easterly (p.55).

I’m a follower of Ha-Joon Chang. Besides reading a couple of his works, I have also met him in person. His arguments are valid when viewed dispassionately against the premises of history, comparative studies of what works and what does’nt, policy as against theory and in particular, the lived experiences of billions of people who have been adversely affected by misguided policy prescriptions of the advocates of free market. As Ben Fine contends during a program in South Africa in May this year, it is one thing to talk about a belief in regulated market and institutions, a la Hayek, it is another thing to formulate policies that are in tandem with such ideologies.
My own argument is that even within the core capitalist countries inequality is worsening (no need for any econometric analysis before one can see this, even though there are many of such studies), as the rich are getting richer and using their wealth to resist any well meaning intention of government to redistribute wealth. Karl Polanyi’s view of the purpose of the state should teach us something if we are concerned with shared humanity as against this extreme individualism and commodification, which now define human existence. Anyone who has experienced poverty in its true form or have interaction with the bottom billion, ala Collier, will not but agree with the Stiglitz, Rodrik and Changs of this world that free trade, eratz capitalism or market fundamentalism is against the spirit of the global commonwealth, which Sachs advocated in his book. Trade is good, but it must be used for the purpose of development and the formulation of trade policy should be conversant with the specificities of history, level of development and the condition of such a country.

Samuel,
Thanks for the comment – on Karl Polanyi, check out my post on ‘Down with Karl Polanyi’. On Chang’s misrepresentation of the evidence on trade and development wait for my next post which will be up on this site early next week.
Best wishes
Mark Pennington

I think what he meant by that statement is, even in so called free market economies, one still find the government involved in protecting some sectors. Take as an example, the issue of subsidies to Agriculture and application on non-tariff barriers in Europe and United States of America. As empirical evidence has clealry shown, these measures negatively affect export of agricultural products from African countries to these countries. In one way, adopting such measures negates the Ricardian principle of comparative advantage upon which free market seems to rest. In the second way, it is a form of contradiction because if indeed the advanced countries support free trade as they claim, they should have the political will to devise other measures to encourage their farmers rather than subsidizing their products, which end up not making prices for agricultural products from Africa competitive. Think of the Doha ‘Development’ Round and the stalemate that has accompany the negotiations and you will see that Chang is right afterall. You may also want to have a recourse to the arguments of some notable economists such as Fredrick List and Alexander Hamilton. Experience of history clearly shows that developed countries of today did not start up with unqualified free trade. Virtually all the developed countries have at one time or the other adopted protectionism and even today, it is still being adopted.

Samuel, right, I guessed that’s what he meant, I was asking if you agreed with or believed his assertion that there is no such thing as a free market.

1) How can something that doesn’t exist (the free market) cause slowed growth as Chang asserts?

2) Chang goes to great lengths to argue that there is no free market because of various regulations and government interventions–but in his cherry-picking method, why isn’t there a chapter analyzing the costs of those interventions or at least an attempt by Chang to demonstrate why it is just free-policies and not government interventions that are allegedly responsible for slowed growth?

His boomerang argument style is bizarre–there is no free market, because the government intervenes in the market, but somehow it is free markets and not government interventions and controls that are responsible.

3) Or why isn’t it the growing welfare/entitlements states that have been responsible for slowed growth? There was a post on Pileus highlighting a Wall Street Journal article noting how many Americans received entitlements. http://online.wsj.com/article/SB10001424053111903999904576470551476951590.html?mod=djemEditorialPage_h
“50.5 million Americans are on Medicaid, 46.5 million are on Medicare, 52 million on Social Security, five million on SSI, 7.5 million on unemployment insurance, and 44.6 million on food stamps and other nutrition programs. Some 24 million get the earned-income tax credit, a cash income supplement.”

So using Chang’s circular reasoning, some free market policies get placed into a sea of socialism, but it is the “free market” that doesn’t exist but also causes slowed growth?

Thanks Casey, to answer your question, I agree with him. It seems you misunderstood his point of view. (I have invited him just now to join the debate). He isn’t advocating for socialism, afterall his home country, Korea is not a Socialist state. His argument is that we should be sincere (even if that is rare in politics), and ensure that we don’t prescribe ‘one size fits all’ kind of approach to all countries. This is essentially because countries are at different levels of development and what works for one may not work for the other. For instance technological capacity of one country is different from the other and this goes on to affect innovation, competitiveness and growth. Welfarism is not anti-growth, it all depends on prioritization and policy direction. If 1% of the population controls 90% of the wealth in a country and the rest are barely surviving, of what benefit is it to the society? While I may agree that people can take advantage of welfare policies and become complacent, I don’t see welfarism as serving impediment to growth. See the Scandinavian countries and compare their standand of living, level of crime, societal stability and inequality with some countries that advocate free market. The central issue that we should be concerned with is that of shared humanity and the fact that in the long run as Keynes said, we are all gone. The state should redistrubute wealth through taxation and other welfare programs that it may deem fit. That, to me, is the way to reduce inequality, ensure stability in the society and enhance a harmonious global peaceful existence.
Except we are right wing bigots who see no good in the good of others, we should be concerned with what happen to our next door neighbour. That is the golden rule.

Mark, your attack on Chang is too easy to be taken seriouly. You left his core argument and went after nugatory and pointless observation. I want to see you attacking his core argument: for instance, the case he made on Infant industry.

Read the second post on Ha Joon Chang: Wrong on Free Trade, Markets and Development – i address that point head on – as I indicated I would in the final sentence of this particular blog which is just the intro to a 3 part series. M

Ha Joon Chang, Joseph E. Stiglitz, and Amartya Sen, made their conclusions from the real world, statistics and numbers comparisons from real economies going for years in countries with real politico-economic problems, including third world countries, and not from THEORIES of the Chicago boys, or the invisible hand of Adam Smith, _____Marx and John Meynard Keynes (30 glorious years) ways were possible during the industrial era with a basically honest production versus consumption principle but would be inefficient today when a completely corrupt non-productive casino-type market economy is going with lobbeying, wild speculation (which can turn a company bank or country bankrupt in a few days) fiscal heavens, hedge funds, privatized fed and money laundering._____so Viva Chang and Freedman Hayek can go to hell.

That really was a rather uncivil comment. There is no mention of ‘Chicago Boys’ in the post. If you would like to see the evidence – much of which is not in fact discussed by Chang/Stiglitz then please read the next post in the series – Ha Joon Chang: Wrong on Free Trade, Markets and Development. That post discusses the evidence – which you ought to be acquainted with.

I have just read the book by Professor Ha-Joon Chang and I must say it more or less matches with my own views on the fallatious notion of the free-market. I agree that there is no such thing as the free-market, Bless Free Market if it suits our interest, hang the free market if our interests tends to be threatened. Free market suits more the well established rich countries who are preying on the smaller so called ” developing countries”. Free Market means rich nations telling the poor underdeveloped ones… ” open up your market for me to exploit at leisure and the way I want….. but I WILL NOT OPEN UP MINE FOR YOU TO DO THE SAME”. In other words, I do not want you to suceed and sit at the same table as me, I want you to be underneath the table so that you can enjoy the puny and pitiful “leftovers” coming from my table, just enough for you not to die of hunger i.e. if you behave and do as I say., THAT IS THE FREE MARKET.

Thanks so much for this insighful intervention to this debate. I agree entirely with you. Besides the issue of market access which dominates the discourse on free trade between North and South is the issue of development. As Dani Rodrik (2001) has argued, it is not enough to use the promise of market access as a bait to make the Least Developed Countries of the South to open up their economies. Development must be at the center of the various negotiations. Such development concern is imperative due to the extreme supply capacity constraints that LDCs are faced with. That is, given domestic constraints that these countries are faced with, even if the Developed countries opened up their economies completely, the LDCs will still not be able to take advantage of the openings. Whose fault, you may ask? Partly that of the LDCs themselves, but also much more that of the Transnational Capitalist Class (a la Robinson 2004), whose deliberate programmes and interventions in the economies of third world countries have led to loss of policy autonomy on trade, finance and investment. So, Ha Joon Chang is right, afterall: No country has developed on the back of exclusive free trade. Mainstream Economists may argue on this till eternity, but the evidence of history eloquently bear out the well-researched position of Ha-Joon Chang.

Dear Mr. Pennington can you please indicate me all the links in which you commented on Chang’s work, in particular on Kicking away the ladder? I coulf not find them. I am writing an analysis of the book and I need to collect all possible info about its critics.
Thank you

Mexico going bad, Ecuador doing better , market controlling societies vs societies controlling the market. Mexico ruled by a ignorant and USA puppet following the recipes of WB and IMF and Ecuador ruled by economist that kick out the WB and IMF.

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